Everything else remaining unchanged, what will happen if the Fed buys government

Question

Everything else remaining unchanged, what will happen if the Fed buys government bonds in the open market and borrowed reserves is zero?

A) It will cause both the equilibrium federal funds rate and equilibrium quantity of reserves to fall.

B) It will cause the equilibrium federal funds rate to fall and the equilibrium quantity of reserves to increase.

C) It will cause the equilibrium federal funds rate to rise, but no change in the equilibrium quantity of reserves.

D) It will cause the equilibrium federal funds rate to fall, but no change in the equilibrium quantity of reserves.

Explanation / Answer

Answer.) B) It will cause the equilibrium federal funds rate to fall and the equilibrium quantity of reserves to increase.

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